Student Managed Investment Fund
USF Student Managed Investment Fund January 22, 2021
Packaging Corporation of America NYSE: PKG
Time to ship this box out: valuations too flamboyant for a packaging company The stars have aligned perfectly to exit our multiyear position in PKG. Originally bought at about $67/share, the Company grew market share and operations rapidly after its 2013 acquisition of Boise Paper. Shares rallied until 2017 but have stagnated since. We currently find little change in the short to medium term story as compared to the previous three years and expected shares to recover to preCOVID-19 levels in the coming 12 months. However, valuations have skyrocketed to levels that are nice for returns, but are fundamentally not justifiable.
COVID-19 and a heavy shift towards digitalization has driven significantly lower demand for industrial packaging and a bleak outlook for printing paper. While 3Q20 results held up decently well and increased e-commerce activity may provide longterm tailwinds, we’d feel more comfortable taking our gains here and putting cash into stocks with more attractive valuations and/or growth profiles. Price Performance Since Purchase (3/20/14) $160
$140 $125 Original PT (2016)
$120
$100
$80
$60
$40
SELL Price as of 1/21/21 close: $140.55 Intrinsic Value: $107 Anton Ashrafyan aashrafyan@usf.edu Skylar Cantone grace22@usf.edu Timothy Henning thenning@usf.edu Tyler Schulman tschulman1@usf.edu
Company Overview Packaging Corporation of America (“PKG” or “the company”) is the 3rd largest producer of containerboard products and the 3rd largest producer of uncoated freesheet in North America. PKG operates through two major segments: packaging and paper. The Company is headquartered in Lake Forest, Illinois and was founded in 1867. Price Target & Risks Our $107 intrinsic value is based on Street case revenue assumptions and an average between our perpetuity growth and exit EBITDA multiple DCF approaches. Factors that could result in overperformance include 1) a favorable supply environment that yields better than expected pricing for corrugated products, 2) decreased raw materials pricing 3) stronger than expected demand for corrugated and paper products.